Introduction
On 9th November, 2015 the council of ministers of Kingdom of Saudi Arabia approved much awaited new Company Law with dual objective of modernizing the company law framework and resolve ambiguities in existing framework in the kingdom. New law also strives to promote foreign investment and encourage small and medium scale enterprises by establishing simpler and flexible entry regulations. This law came into force with effect from 2nd May, 2016 and shall annul all the provisions of previous company law. Provisions of this new law are much in line with the Kingdom’s National Transformation Plan 2020 and the Saudi Vision 2030 to facilitate the kingdom to diversify its economy and reduce its dependence on energy and oil sector. Following are the major amendments made by New Company Law.
Widened Scope for Capital Market Authority
New law authorizes the Capital Market Authority for monitoring and regulating the operations of Joint Stock companies and to participate with the Ministry of Commerce and Industry (MoCI) in preparing the rules for implementation of new law. While MoCI still remains the primary authority, scope of capital market authority is also broadened.
Relaxed and Simpler Regulations
- New law allows single person to form a Limited Liability Company (LLC). Earlier at least two persons are required to form an LLC. However, law prohibits single shareholder of one LLC from being sole shareholder in more than LLC.
- Minimum shareholder for forming a Joint Stock Company (JSC) is now 2 while earlier the requirement was 5.
- Minimum capital requirements for companies have also been reduced but these are subject to additional capital requirements under Foreign Investment Law, wherever applicable.
- Minimum total statutory reserve is reduced to 30% from 50%. This is a welcome move as it will provide more liquidity to companies.
- If the losses of company reach 50% of its capital and the shareholders failed to take any action within the stipulated time, the company will be deemed dissolved and shareholders cannot be held personally liable on failure to convene a meeting.
- New confidentiality clause will be imposed on shareholders in respect of information about the company available to shareholders.
- Change of articles of association will not be required for registering transfer of shares under new law and now the transfers can be registered only by recording them in a register specially made for this purpose.
Protection of Investor’s Interest
To protect the interest of investor and shareholders, new law imposes stringent provisions to be followed by management of the company. Some of the major provisions are:
- Right to nominate board member will be directly associated with the percentage of shares held.
- Board will be required to establish an audit committee which is mandatorily required to be independent to board of directors.
- Modernization of provisions to convene general meetings.
- Chairman and members of board are not allowed to hold executive positions in the company.
The Transformation
Companies formed under new law will consequently comply with this law and the existing companies in Saudi will now have to tighten their shoes to comply with the provisions of new law. Article 224 provides existing companies a period of twelve months to comply with the provisions of new law. However, it is advisable to transform into new law at the earliest, because the penalties will be levied from the effective date of new law.
Bottom Line
The government of KSA is taking effective steps to strengthen the economy and changes in foreign investment regulations and simpler and flexible entry provision will definitely attract investors. Stringent corporate governance norms will again boost confidence of investors. Now the management have to understand the requirements under new law take effective steps to comply with the provisions of new law at the earliest to save companies from paying unnecessary penalties.
